Accounting is the systematic recording, maintaining, reporting, and analyzing of business transactions. Specifically, accounting allows business entities to use a historical record of the business transactions in order to file tax returns and other documents with a governmental entity, update records for shareholders, and to predict and optimize future transactions.
One aspect of accounting is to record the assets and liabilities of the business entity. In general, an asset is a tangible or intangible resource that is used by an owner. For example, an asset may be a computer, an office supply, manufacturing equipment, a display case, furniture, patent, or any other resource. The useful life of the asset is the predefined duration of time in which the asset is deemed capable of being used by the owner. The duration of time may account for usage, wear and tear on the asset, outdating or obsolescence of the asset, decay, or other factors that deplete the value of the asset to the business.
During the useful life of the asset, the owner depreciates the purchase price of the asset. Specifically, the owner may claim, as an expense, a portion of the purchase of the asset at each year during the useful life of the asset. Thus, at the end of the useful life, the owner has claimed, in total, only and the entire purchase price of the asset. By claiming the portion of the purchase price as an expense, the owner may reduce their income by the amount depreciated.